Piper Jaffray Companies (PJC)

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Piper Jaffray Companies (PJC)

Q3 2013 Earnings Call

October 16, 2013 9:00 am ET


Andrew S. Duff - Chairman and Chief Executive Officer

Debbra L. Schoneman - Chief Financial Officer, Principal Accounting Officer and Managing Director


Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Devin P. Ryan - JMP Securities LLC, Research Division

Michael Wong - Morningstar Inc., Research Division



Good morning, ladies and gentlemen, and welcome to the Piper Jaffray Companies conference call to discuss the financial results for the third quarter of 2013. [Operator Instructions]

The Company has asked that I remind you, statements on this call that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements that involve inherent risks and uncertainties. Factors that could cause actual results to differ materially from those anticipated are identified in the company's earnings release and reports on file with the SEC, which are available on the company's website at www.piperjaffray.com, and on the SEC website at www.sec.gov. This call will also include statements regarding certain non-GAAP financial measures. These non-GAAP measures should only be considered together with the company's GAAP result. Please refer to the company's earnings release issued today for a reconciliation of these non-GAAP financial measures to the most comparable GAAP measure. The earnings release is available on the Investor Relations page of the company's website or at the SEC website. As a reminder, this call is being recorded.

And now I'd like to turn the call over to Mr. Andrew Duff. Mr. Duff, you may begin your conference.

Andrew S. Duff

Good morning, and thank you for joining us to review our third quarter results. I will spend a few minutes discussing the market environment and the performance of our businesses, and then hand the call over to Deb to review our financial results.

Assessing the market environment at high level, we continue to see gradual improvement in the equity markets, while performance in fixed income markets remain significantly influenced by the Fed's plans related to their current quantitative easing program.

Addressing equity markets first, the S&P index was up almost 5% for the quarter and 18% for the year, as funds flowed into equities have been positive for each quarter this year, reversing a 2-year trend of outflows. As might be expected, our asset management business benefited from these market trends. Market appreciation was particularly robust in the growth sector stocks, which provided further conditions for capital raising in key sectors where we compete. Conversely, despite the favorable market conditions, U.S. equity trading volumes were down for the quarter and the M&A activity remained relatively soft.

In the fixed income area, as we expected, interest rates gradually increased through most of the quarter in reaction to the Fed's guidance in June that they intended to taper QE3 purchases in the near future. This adversely impacted trading volumes as investors reduced trading activities while they assessed uncertainties related to the Fed's activities. Rising interest rates also had a negative impact on public finance issuance as debt refundings became less attractive.

Early in September, however, the Fed reversed course on its plans to taper its QE3 program. Bonds rallied on the news as interest rates declined to June levels and spreads on municipal bonds narrowed. This had a positive impact on our sales and trading activities, however, new issuance activity in public finance remained low throughout the quarter. Despite the recent decline in interest rates, our operating assumption still calls for a gradually increasing rate environment.

Moving on to the performance of our various businesses, our equity capital raising group produced very strong results for the quarter. Our healthcare group led the way by managing 15 offerings in the third quarter, including serving as a bookrunner on over half of these offerings.

The investments we made earlier in the year in strengthening our biotech group are beginning to pay off as the biotech team made meaningful contributions to our healthcare results. As we head into Q4, it appears that investors still have an appetite to invest in growth sector companies.

Our M&A business put up a solid quarter, generating revenues in Q3 that were greater than our M&A revenues through mid-year. Year-over-year, we are slightly down compared to 2012, which is in line with the broader market. Despite strong equity markets and available financing, the market remains well below peak levels last seen in 2006 and '07. We attribute the lack of market momentum to relatively low growth in the broader economy and considerable uncertainty regarding government policies.

On a more positive note, integration of Edgeview, which we closed in July, has proceeded smoothly. In the third quarter, they closed their first 2 transactions as part of the Piper Jaffray team. Our equity sales and trading business continues to build momentum. Q3 represented the fifth consecutive quarter of sequential improvement in revenue. The improvement was driven by better trading results and execution of a block trade where we provided additional liquidity to an underwriting client. For the quarter, our equity business was up 28% over the third quarter of 2012 in a market where broader trading volumes have declined 4% year-over-year. In public finance, challenging market conditions adversely impacted our results where we were down both sequentially and year-over-year. On a year-to-date basis, our business was down 3% versus 2012, while negotiated new issue volume is down 16% for the entire market. Our investments and expansion efforts over the past couple of years continue to bear fruit as Piper Jaffray is the only underwriter in the top 10 to actually increase its new issue volume compared to the last year.

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